So when do we have to start worrying about inflation? With economic activity falling off a cliff through much of the world, the answer would seem not for some time. History has shown, however, it is never too early to worry.

"Human nature tends to focus on the short term. And in the short term, the risk is deflation and it's a real risk," said Benjamin Tal, senior economist at CIBC World Markets. "But we are fighting it. We are fighting it much more aggressively than any time in history and there is a very high likelihood we will win. And if we win there will be inflation."

With this in mind, news reports that the U. S. Federal Reserve is considering issuing its own debt could be revealing, signalling perhaps the central bank itself is beginning to get antsy about all the liquidity in the system.

The Fed, according to a report in The Wall Street Journal, would issue bills or some form of debt, separate from the U. S. Treasury. Economists were still scratching their heads about it last week and could not even decide whether such a move would give the Fed a new tool to add further liquidity or drain it.

Goldman Sachs argued the Fed could issue debt and then use the proceeds to buy up longer-term risky assets, such as private-label mortgages and corporate bonds, an action authorities have been considering to push down yields and borrowing costs even further if deflation risks accelerate.

Merrill Lynch, however, saw it as a tool drain liquidity. The Fed could issue debt, get cash in return and then keep the cash rather than redeploy it.

Even Goldman Sachs, which has been hammering the deflation drum recently, admitted the Fed could be starting to get concerned about the speed with which the U. S. monetary base has been expanding. Bank reserves plus currency in circulation soared to US$1.47-trillion in the week ended Dec. 3, up from US$843-billion three months earlier, it notes.

Derek Holt, vice-president of economics at Scotia Capital, writes, however, that should not be alarming since it began to explode only once the Fed started paying interest on reserves left at the bank. The result was to suck liquidity out of money markets, and onto the Fed's balance sheet, which is then redirected out to U. S. financial institutions and other countries via currency swap lines.

It is clear, though, that the Fed is engaged in one giant brow-furrowing monetary policy experiment. Issuing its own debt seems absurd. It would open up bizarre arbitrage opportunities between central bank and treasury debt, allowing investors to trade directly on the credibility of the Fed.

Whether it goes ahead, there is no dispute the stimulus is piling up. Last week it was Europe's turn, with the European Union agreeing to a package of 1.5% of GDP, or around US$265-billion. U. S. president-elect Barack Obama's stimulus plan is rumoured to be anywhere from US$300-billion to US$1-trillion, while Canada is expected to announce a stimulus budget in January.

U. S. federal borrowing is likely to exceed US$4-trillion over the next three years and US$2-trillion next year --a whopping 16% of GDP.

All this fiscal and monetary stimulus is not seen as inflationary as it is merely replacing collapsed private-sector activity, but both central banks and governments always seem to miss the boat when they have to withdraw the stimulus.

The Fed missed it massively after the tech wreck, helping to create a housing bubble and the eventual bust. Governments missed it in the 1970s, 1980s and 1990s and deficits inevitably piled up.

This time around, central banks and governments are working so closely in tandem that Donald Coxe, global portfolio strategist at BMO Financial Group, worries neither will know when to take the punch bowl away.

"We will not get a response in time to head off inflation," he said.

Jeff Rubin, chief economist at CIBC World Markets, agrees.

"While politicians and financial markets fret about deflation risks, history has shown inflation to be a far more common dancing partner to massive government deficits," he said in a recent note.

Certainly Mr. Coxe and Mr. Rubin, both uber-commodity bulls, are undoubtedly hoping the Great Reflation will work.

The risk for the rest of us is it will work too well.

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